Los Angeles Times COMMENTARY

Feds Are Feeding an Urban Money Pit

Spending taxes on community development only helps the politicians.

By Robert Krol and Shirley Svorny
Robert Krol is a professor of economics and Shirley Svorny is chairwoman of the
department of economics at Cal State Northridge.

March 16, 2005

U.S. economic development policy has taken one shot after another at improving
conditions in deteriorating urban areas. But even after all these years,
run-down neighborhoods across the nation attest to the failure of
government-directed programs to stimulate business and create jobs.

Now, President Bush has proposed consolidating 18 economic development programs
into one — under the name "Strengthening America's Communities" —
to be run by the Commerce Department. The proposal would create a $3.7-billion
economic development fund, with the money directed specifically to
"development-ready communities" — ones that have made a visible
effort to reduce crime, improve schools and reduce regulatory barriers to
commerce and housing construction.

The idea is that the administration would be rewarding governments for creating
the conditions needed for economic growth.

Sounds good. But the problem is that the fund would be aimed toward traditional
programs (job training, lending and subsidizing hotels and convention centers)
that have proved to be ineffective in promoting broad-based community
development. We suggest that the money be used instead to help make communities
development-ready, rather than just to reward those communities that already
have achieved that status on their own.

In Los Angeles, one need not look far to see examples of failed economic
development programs. The Los Angeles Convention Center has required substantial
ongoing public support — $20 million in 2004, according to the Los Angeles
Business Journal. The federally funded Los Angeles Community Development Bank
went belly-up last year, with losses of more than $40 million (a charge-off of
an astonishing 40% of loans made — compared with 1% at commercial banks). In a
country with the most highly developed financial system in the world, government
should not be in the lending business.

Claims that jobs are created by economic development agencies overstate the net
addition to employment. Most generally attract new workers rather than put local
labor to work, or jobs are just moved from one community to another, further
exaggerating claims of net job creation.

These failures are the result of public-sector decisions, influenced by special
interests. Decisions reflect politics rather than hard financial evidence of
project viability.

More often than not, federal subsidies to private economic development benefit
only a small group of interested parties (such as the hotel industry when a
convention center is subsidized) and fail to achieve the broader goals of
economic development for the community at large.

So why have such programs continued? The answer is politics. Local officials
leverage federal dollars for political support. A subsidy to a developer or a
low-cost loan may pay off in terms of campaign contributions from that developer
down the road. Perhaps the powerful public employee unions need to recognize
that they can play a role in redirecting local spending away from politically
motivated lending or subsidies and toward essential public services.

In a perfect world, we would dramatically scale back the federal government's
role in state and local economic development. Without federal funds, every
program a city proposed would have to be paid for in full by local or regional
taxpayers. Cities and regional governments currently embark on expensive
development programs they would never support if they had to pay for it
themselves.

The second-best solution is to limit state and local spending of federal funds
to public services and forbid state and local efforts to set up loan programs or
development and employment efforts better handled by the private sector. The
proper role of government in the economic development process is to create the
conditions that allow private economic activity to flourish.